In Japan, some courts have held that a termination clause will be considered to last for an indefinite term even if parties have renewed the agreement several times regardless of whether the agreement was for a definite term and had a non-renewal clause. Japanese companies often prefer a termination clause in which the agreement is automatically renewed without notice after a certain period. This may be expected even though the provision requires a party to give notice of its intention not to so renew or to renew prior to expiration of the term. They view the termination clause as a token of their relationship with the other party. On the other hand, U.S. companies tend to look at the termination clause as a tool for allowing them to get out of the agreement in which each party may terminate the agreement without cause and without prior notice or each party may refuse to renew the agreement by giving notice prior to the expiration date. This may be because the U.S. companies value the language of an agreement over their instinctive sense of trust and view any new transaction with a short term goal, while the Japanese companies intend to nurture their relationship and set out a long term goal with the U.S. companies. Accordingly, particular attention should be paid to whether a party’s intent is beyond what is stated in the agreement especially if the Japanese law is controlling.

The main purpose of an indemnification clause is to minimize risks of incurring losses if a seller does not perform in accordance with the obligations of an agreement or if the seller breaches what it disclosed in the representations and warranties.Thus, the indemnification clause will provide a buyer with some degree of legal protection, in the unlikely event that any legal issues arise with respect to the seller’s business activities especially in a M&A transaction. Below are the important points you should keep in mind when you review an indemnification clause in the M&A transaction.

1. Scope of Indemnification - a) The clause should cover all kinds of actions, such as claims, demands, costs or judgments against you. This would include a settlement or a court award, directly or indirectly incurred in connection with any inaccuracy, misrepresentation or default or warranties given by the seller in the Agreement. b) The clause should cover items that are disclosed in the seller’s representations and warranties for which the seller retains responsibility after the closing.

2. Duration - a) Generally, an indemnification time period should be one to three years after the closing. Exceptions may be made for environmental and tax liabilities, for which the time period may be the applicable statute of limitations.

3. Indemnifying parties - a) The indemnification clause must include proper parties, that includes third parties, such as shareholders, agents, employees and affiliates who could possibly be subject to the said transaction.

4. Basket - a) The seller could be liable for the total amount of the losses, but does not have liability until the amount of the buyer’s losses exceeds a certain sum when there is a basket of a certain sum. The amount of the basket should be carefully negotiated through the buyer’s due diligence investigation.

5. Escrow - a) The buyer may require that a portion of the purchase price be held in escrow to ensure that there are enough funds available to satisfy the seller’s indemnification obligations. The amount of the escrow should be carefully determined after examining the value of the property /company.

6. Limitation on Liability and Remedy - a) For the seller, it is important to limit its post-closing indemnification obligations in several ways: 1) The seller will try to limit the time period after the closing for which it has indemnification obligations; 2) the time period should be based upon a reasonable period of time within which a third party would make its claim, 3) the seller will try to impose a cap on the total amount of its indemnification liability, and 4) the seller will try to negotiate a basket on its indemnification obligations, in order to eliminate small indemnification claims. b) For the buyer, it is important to renegotiate the terms and conditions or hold back a portion of the purchase price, if the seller does not have sufficient funds available to satisfy the seller’s indemnification obligations. The buyer also needs to secure its interests or prospects of future business, after closing, and take into consideration the seller’s potential liabilities, which may only have been revealed after the closing.

The language in a Force Majeure provision focuses on events that make it impossible for a company to provide services due to acts of God, war, terrorism, government regulations, disaster, strikes, fire, civil disorder, curtailment of transportation facilities, or other similar cause beyond the control of the company. Under that provision, some companies are under an obligation to use their best efforts to continue to perform or cure. For example, you, as a service provider, might be forced to cure or perform your services even after a typhoon hits a city where your service facility is located. Others are, however, required to use only reasonable best efforts, commercially reasonable efforts or reasonable efforts. Obviously, the best efforts impose a higher level of obligation on a service provider than any other efforts. If the other company insists, during negotiations, that you be required to use "your best efforts" as opposed to "commercially reasonable efforts", you should make yourself aware of the subtleties provided in the Force Majeure provision.

In a cross border transaction with Japanese companies, Western/American companies are often confused by how the Japanese approach business transactions; the Japanese do everything they can to retain the relationship for operating their businesses abroad, despite their passive predisposition. In addition, Japanese business people tend to emphasize trust over formal written agreements in order to maintain a good business relationship. As a result, the Japanese put less effort into how they should craft an agreement than their effort of how they finalize a deal, and it takes time to make them understand the need for certain provisions in the agreement. Unfortunately, Western business people often interpret their approach as a flaw of their business model. Any cross border business transaction requires understanding of the other’s culture and patience. Western business people are also encouraged to recognize these differences and nurture their relationship with Japanese companies besides their binding relationship under the agreement.

There has been a common question relating to acquisition transactions; how do you determine seller’s liabilities? Only a half portion of the seller’s liabilities can be discovered by a buyer during its due diligence investigations, but the other half could be covered by the seller’s representations and warranties provided in a purchase agreement. For example, if the buyer finds out that the seller has not complied with local regulations with respect to its labor/employment, the buyer’s best bet is to hold a portion of the purchase price in escrow and give the seller a promissory note for that portion but retain the right to offset the promissory note to satisfy the buyer’s indemnification claims.

"Mitsubishi UFJ Financial Group Inc. said Monday it has bought a 21 percent stake on a fully diluted basis in U.S. investment bank Morgan Stanley for $9 billion after making revisions to the terms of the acquisition." The Japan Times article by Kyodo News posted on Tuesday, Oct 14, 2008. <"http://search.japantimes.co.jp/cgi-bin/nb20081014a1.htmlhttp://search.japantimes.co.jp/cgi-bin/nb20081014a1.html">http://search.japantimes.co.jp/cgi-bin/nb20081014a1.html</a>As you can see from recent news articles like the one above, Japan appears to have been slowly regaining its economic power by expanding its businesses abroad again. When the Japanese bubble burst in the early 1990s, Japanese banks retreated to their own shores. In addition, individual Japanese had a much higher individual rate of savings most of which were in very conservative investments or basic saving's accounts. In the US, due to the notoriously low rate of savings as well as American's tendency to put their money and retirement savings in higher risk investments, an average American is in a worse financial position than that of Japanese both 15 years ago and today.

井上奈緒子

Naoko Inoue Shatz is a U.S. lawyer who has extensive business experience in Japan, and she has a wide range of practice experience involving cross border matters and legal disputes between U.S. and Japan. Her dedication and responsiveness in addition to her experience has often helped corporate clients quickly uncover challenging issues and develop a sound business relationship. 井上奈緒子は日本でビジネスの経験を持つ米国の日本人弁護士で、アメリカと日本の2国間にかかわる一般法務から法的紛争にわたって幅広い経験を持ちます。さらに専心さと対応力に関しても多くのクライアントから評価を得ており、国際商業取引業務においてクライアントとは確実な関係を築きあげてきています。Read More

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